Fifth birthday of bull run making mutual funds look better than they are
Dec 12th, 2007 | Filed under: Investment Management Fees, Performance, Analytics & MetricsWith the recent 5th birthday of the latest bull market, it’s getting hard to find a mutual fund that hasn’t produced great 5-year returns. Apparently this fact is not lost on Morningstar, which is rumoured to be considering the addition of 7-year data to its mutual reporting. This is a great idea and, in a sense, is a crude approximation of alpha.
The last few years have provided mutual fund investors with a unique opportunity to compare their funds to a full market cycle, not just to a bull market (where levered or growth funds are likely outperform) or a bull market (where unlevered or conservative funds are likely to outperform). The chart below shows the rolling 5 year (weekly) returns of the S&P 500 beginning in January 2005. The section of this chart shaded in blue represents the future 5-year rolling returns of the S&P 500 (not annualized) assuming - for the purposes of this argument - that the index flatlines at Tuesday’s close until the end of the decade.
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